Sir Mervyn King has said - in a rare admission - that the Bank of England
failed to do enough to warn about the risks building up in the banking
sector ahead of the financial crisis.

"We did preach sermons about the risks. But we didn't imagine the scale of the disaster that would occur when the risks crystallised," he said.

"With the benefit of hindsight, we should have shouted from the rooftops that a system had been built in which banks were too important to fail, that banks had grown too quickly and borrowed too much, and that so-called 'light-touch' regulation hadn't prevented any of this ...

He said the Bank "tried, but should have tried harder" to persuade everyone of the need to recapitalise the banks sooner and by more.

However, he claimed the Bank was hamstrung by the decision to move regulation to the Financial Services Authority (FSA) in 1997 – a reform "that would return to haunt us". It left the Bank with the limited power of "publishing reports and preaching sermons". Regulation is now being moved back to the Bank.

Sir Mervyn King: 'Why did the Bank not do more to prevent the disaster? We should have. We should have shouted from the rooftops... We should have tried harder.' (Photo: Bloomberg News)

In a veiled attack on Labour and the FSA, he also revealed that he had pushed for a major recapitalisation of the industry in early 2008 but been rejected because "it wasn't a popular message".

"From the beginning of 2008, we at the Bank began to argue that UK banks needed extra capital – a lot of extra capital, possibly £100bn or more," he said in the second BBC Today Programme Lecture on Wednesday evening.

A bail-out was orchestrated in October 2008, and a second one in early 2009. Ultimately the banks raised a similar amount, with taxpayers injecting almost £70bn into Royal Bank of Scotland, Lloyds Banking Group and Northern Rock.

"That bold action in October 2008 could have happened sooner," Sir Mervyn said.

He said that after the ravages of inflation in the 1970s it was "understandable" that the Bank focused on the need to bring inflation down, "but conquering inflation was not enough to ensure stability".

"On all sides there was a failure of imagination to appreciate the scale of the fragilities and their potential consequences. No-one could quite bring themselves to believe that in our modern financial system the biggest banks in the world could fall over. But they did," he said.

Sir Mervyn King attacked Britain's banks for bringing the country to the brink of ruin and demanded urgent reform to spare "our grandchildren" a similar fate.

He has blamed the banks for the recession and stressed that an overhaul of the financial system, including the separation of retail banking from "risky investment banking", was essential "to make our economy safer".

The comments will pile pressure on the Chancellor not to cave into the banking lobby and to press ahead with planned legislation to ringfence retail banking by 2015.

"We don't build nuclear power stations in densely populated areas, nor should we allow essential banking services and risky investment banking activities to be carried out in the same 'too important to fail' bank," Sir Mervyn said. "It is vital that Parliament legislates to enact these proposals sooner rather than later."

He also pledged to crack down on the "vested interests [who] rise up to defend their bonuses and profits".

Sir Mervyn underlined the scale of the financial crisis by claiming that "almost all Britain's banks would have failed had not taxpayer support been extended" to the entire system at the end of 2008, and not just Royal Bank of Scotland and Lloyds Banking Group, the two state-backed lenders.

(Audio only)

"This was a bust without a boom," he said. "Our banking and financial system over-extended itself... The realisation of the true state of the banking system led to a ... deep global recession. Unemployment in Britain rose by over a million.

"To many of you this will seem deeply unfair, and it is. I can understand why so many people are angry."

&lt;noframe&gt;Twitter: Andrew Sentance - Disagree with Mervyn King that fin crisis was bust without a boom. See chart attached - it was just a very long boom! &lt;a href="http://t.co/j9LIi37u" target="_blank"&gt;http://t.co/j9LIi37u&lt;/a&gt;&lt;/noframe&gt;

Extensive reform is already under way, he added. As well as moving regulation back to the Bank and ringfencing retail banking, the Bank will have new powers from next year to "prevent a hangover by taking away the punchbowl just as the party in the financial system is getting going".

Some of those powers, such as possible loan-to-value caps on mortgages, "won't make us popular among bankers, politicians and even at times some of you [the public]", he warned.